Row we weren't to have, over tax cuts no one wants

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Suddenly we find ourselves in an enormous blue between Canberra
and the states over a pile of money - just the sort of blue John
Howard told us would end when he gave his GST money to the
states.

Why? After five years in which the once-hated GST has settled in
cosily, giving the states bumper revenue, why has Peter Costello
issued the states an ultimatum directing them to get rid of seven
business taxes or (in effect) risk losing their GST harvest?

There are several reasons. To Costello, it is unfinished
business from his original GST blueprint in 1998. It grates on the
Howard Government that the revenue bonanza it risked so much to set
up is now gushing money for the benefit of eight Labor governments
in the states and territories.

And, let's be blunt: for Costello, the fact that these are tax
cuts hardly anyone wants is all the better. He can force state
Labor governments to lose $2.5 billion of revenue a year on tax
cuts that will win them no votes - instead of using them for
something politically useful, such as cutting land tax or stamp
duty on homebuyers.

All seven taxes were earmarked for abolition in Costello's 1998
blueprint, and put there by state treasury officials, then mostly
under Coalition state governments. But in 1999 they were taken out,
because without a GST on food there was no longer enough revenue to
afford them.

The states agreed that in 2005 they would "review the need" for
keeping these taxes. Costello might genuinely believe this implied
a commitment to get rid of them if the GST gave them enough
revenue, as it has. But as a lawyer he knows the states are legally
in the right.

Clearly a commitment to review is not a commitment to abolish
them. If Costello tore up the GST agreement and the states took him
to the High Court, his claim that the states have welshed on the
deal would not last two minutes.

The real driving force here is political. The states, like any
governments, love to offer tax cuts, so long as they are
politically popular. What appeals to Costello about this list is
precisely that they are not politically popular. And the
Commonwealth has ways to make the states pay if they defy it.